AI has been a bright spot for the company.
It’s been tough going for Alibaba Group (BABA 2.04%), with its stock cut in half over the past five years. The company has had to deal with a long period of COVID lockdown restrictions, a sluggish Chinese economy following the lifting of lockdown restrictions, and intensified competition in its largest segment, e-commerce.
However, one bright spot the company has been seeing is in the area of artificial intelligence (AI). Alibaba is now looking to make a bigger push into the arena to help drive growth.
New open-source AI models released
Like other parts of its business, Alibaba’s cloud computing segment has experienced some issues over the past five years as it has dealt with increased competition. However, Alibaba started to turn around the business and has been letting low-margin project-based contracts roll off in favor of more attractive public cloud deployments.
This move has hidden some of the strides that its cloud computing unit has been seeing in terms of revenue, but it has led to much higher segment profits. For example in Q2, its cloud segment revenue rose 6% to $3.7 billion, while the segment’s adjusted earnings before interest, taxes, and amortization (EBITA) surged 155% to $322 million.
Meanwhile, Alibaba has developed its own large language models (LLMs), which have been resonating with customers who have been using its services and infrastructure for help with AI development. The company said AI-related revenue soared by triple digits last quarter.
However, Alibaba is not sitting still. On Thursday, the company released over 100 new open-source AI models. The models have varying degrees of precision, are in areas such as language, audio, vision, coding, and mathematics, and are based on the newest iteration of its LLM, called Qwen 2.5.
The company said it has also introduced a new text-to-video model and an improved large vision language model. The new text-to-video model is part of its Wanxiang LLM family and will allow users to turn images into video simply by typing prompts in Chinese or English to help create video. The improved vision language model, meanwhile, will be able to support video-based questions and answers and extends its comprehension to videos over 20 minutes.
Alibaba also said that in addition to the new AI models, it has significantly upgraded its AI infrastructure services in the areas of data center architecture, data management, and model training and reasoning. The company added that it has been investing with “unprecedented intensity” and is looking to serve global customers.
Image source: Getty Images.
Is Alibaba stock a buy?
Without access to the cutting-edge hardware of its U.S. counterparts, it seems unlikely that Alibaba would be able to compete with the likes of Amazon Web Services or Microsoft Azure on a global level when it comes to AI. In addition, many Western companies could be reluctant to use a Chinese company to help with their AI endeavors.
That said, China is the second-largest economy in the world, so there is plenty of room for Alibaba to grow within its home country and throughout other parts of Asia. Meanwhile, the company does count a number of U.S. and other Western customers that use its cloud services, including Ford Motor Company, which uses Alibaba’s cloud services for its digital platform in China.
As such, I still think Alibaba’s AI model and infrastructure business have the potential to drive continued solid growth. At the same time, there have been signs of improvements in its core e-commerce businesses as well. Orders at its e-commerce sites Taobao and Tmall climbed by double digits in Q2, while gross merchandise value (GMV) jumped by high single digits. The company said it will begin to look to slowly increase its monetization not that GMV is beginning to solidly grow again. This should help lead to higher revenue and profits.
From a valuation perspective, Alibaba’s stock is cheap, trading at a forward price-to-earnings ratio of about 10 based on 2024 analyst estimates, and an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple of 7 times. Enterprise value takes into consideration the $50 billion in net cash Alibaba has on its balance sheet while EBITDA takes out non-cash expenses.
BABA PE Ratio (Forward) data by YCharts
With Alibaba’s core e-commerce business showing signs of stabilization and the company having a nice opportunity with AI and its cloud computing segment, now looks like a golden opportunity to buy Alibaba before these improvements start showing up in its earnings results.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has positions in Alibaba Group. The Motley Fool has positions in and recommends Amazon and Microsoft. The Motley Fool recommends Alibaba Group and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.